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What is Portfolio Rebalancing? Think of your portfolio like a carefully proportioned recipe—maybe you planned for 60% equity and 40% fixed-income assets. But over time, especially in a market like India’s, which saw small-cap indices jump over 25% in 2024, those proportions can shift. Suddenly, equities might account for 70% of your portfolio, increasing your exposure to volatility beyond what you’re comfortable with. Rebalancing is the act of bringing your asset mix back to your intended target. It involves trimming gains from outperforming assets (like equities) and reallocating to underperforming ones (like debt or gold), thus maintaining your original risk profile.
Why 2025 is a Good Time to Rebalance The Indian economy is expected to grow steadily at 6.5–7% in 2025, with booming sectors like renewable energy, electric vehicles, and technology continuing to draw investor attention. However, there are also challenges ahead—rising interest rate uncertainty, global trade tensions, and potential tariff changes from the U.S. may lead to increased market volatility. In this backdrop, Indian retail investors, many of whom entered the markets during the 2020–21 bull run, might find their portfolios skewed heavily toward equities. Rebalancing ensures that they don’t end up overexposed to one sector or asset class and helps lock in profits systematically.
Rebalancing Strategies You Can Use 1. Threshold-Based Rebalancing: Set a deviation limit—say 5% or 10%—from your intended asset allocation. If your equity allocation crosses 70% in a 60/40 plan, you sell some equity and reinvest in debt instruments like PPFs, FDs, or gilt funds. This automatic trigger helps avoid emotional decision-making. 2. Periodic Rebalancing (Calendar-Based): Decide to rebalance every quarter, biannually, or annually regardless of market performance. This disciplined approach ensures your portfolio stays on track without the need to time the market—something notoriously difficult even for professionals. 3. Cash Flow Rebalancing: Use SIPs, dividends, or bonus payouts to reinforce underweight asset classes rather than selling existing ones. For example, if gold is underrepresented in your portfolio, direct fresh funds into gold ETFs or sovereign gold bonds. It’s a tax-efficient and smoother way to rebalance. 4. Tactical Shifts: For more active investors, small strategic adjustments based on market outlooks may be beneficial. For example, in anticipation of interest rate cuts, you might lean into long-duration bonds. However, this approach requires a higher risk appetite and more active monitoring.
Things to Watch Out For Rebalancing isn’t free. In India, selling equity before one year incurs short-term capital gains tax at 15%, and long-term gains above ₹1 lakh are taxed at 10%. Additionally, frequent rebalancing can result in brokerage fees and exit loads from mutual funds. Therefore, many investors prefer doing it once or twice a year and using tax-loss harvesting techniques when possible. Final Thoughts Portfolio rebalancing might not sound exciting, but it’s the foundation of disciplined investing. Whether you're a salaried professional investing through mutual funds or a seasoned trader dabbling in direct equity, keeping your portfolio aligned with your goals is key to long-term success. With Indian markets expected to remain dynamic in 2025, now is an excellent time to evaluate, rebalance, and reaffirm your investment strategy.
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